Now more than ever it is vital that our children gain solid skills when it comes to managing money. As we watch them move into adult life, we see the increasing financial challenges that they face with the cost of housing, the growing pressures of a consumer society and the ease of obtaining credit.
Much of this is a far cry from what we faced in our younger days – when things seemed a lot simpler. This makes it more vital than ever to pass on some of the wisdom we have gained over the years through our own financial successes and failures. Here are some tips that may help.
A word of warning
The first rule when discussing money with adult children is to recognise that it can be a highly charged subject. For a variety of reasons money can be an emotive and tense subject, so it pays to be sensitive and measured in how discussions are raised.
It doesn’t matter how much we think we know and understand about financial management, if our approach to our children comes across as interfering, patronising or demeaning, then the message will meet resistance. Make it a priority to gain their agreement about even starting the discussion before pouring out your wisdom. Respecting their independence and intelligence will gain a lot more cooperation.
Controlling the bank of mum and dad
If we have adequate financial resources of our own we may feel obligated to help out with some cash from time to time. While this may be reasonable in some circumstances, it should never be done at the expense of letting our children take financial responsibility for themselves. Rather than giving open-ended cash handouts, be specific in asking how the money will be used. To use an extreme example, handing over $10k for them to blow on a holiday is very different from them using the money toward a home deposit, so guide them to use financial gifts responsibly.
Pay yourself first
One of the most fundamental principles you can pass on is the concept of “paying yourself first”. In other words; save BEFORE you spend and set aside a percentage of every dollar of income toward the goal of financial independence.
More specifically, some of these savings dollars need to be set aside purely for the purpose of investment and financial growth. It is all too easy to lump all savings together, but saving for an expensive handbag is very different than saving for investment, so try to guide your offspring into being specific and goal driven about the purpose and allocation of their savings.
Passing on some budgeting tips can help make your children’s lives a little less financially stressful
Pay down high interest debt
The lure of easy credit and the convenience of “plastic money” can easily get our kids into debt very quickly, which can stifle any long-term financial development. The key lesson to pass on regarding debt is to focus attention on high interest debt, (such as credit card debt), first, even if it is to the exclusion of savings goals for a short period.
For example, a $10,000 credit card debt at 18 per cent interest will cost $1800 in interest in a year, if no repayments are made. If they were investing $10,000 they would be doing extremely well if they were able to get an $1800 annual return, so treat high interest debt as if it was a high interest investment and go all out to pay it down quickly to get back into balance.
Protect against disaster
Sometimes the most productive dollar your kids will ever invest will be the dollar paid on insurance premiums. They have probably already learned at an early age that you simply don’t drive a car around uninsured. A vehicle worth thousands of dollars can be suddenly worthless in an instant if it is not insured.
While most parents do well in teaching the kids the value of insuring possessions such as cars, many will often overlook the far more critical importance of income protection and life insurance. A car might be valued in the tens of thousands, but their income over their lifetime will be valued in the hundreds of thousands, if not millions, so leaving it unprotected is simply financial folly.
Make sure they are in contact with a reputable financial planner who can help them create a comprehensive contingency plan for their insurance protection as a foundation for all their other financial planning.
Budgets are boring, but…
In a highly disposable consumer society and in an age of high career mobility and income expectations, the simple common sense of a household budget may seem a bit dull and archaic. Too often our kids will think the solution to a cashflow problem is simply to get a better job with a higher income. This mindset is the root of the problem. If they are earning more, chances are they will just spend more if they don’t have sound budgeting skills.
Encourage your kids to get their income and expenses budgeted. It doesn’t matter if it is with pen and paper or a smart phone app, the important thing is to have a concrete system that allows them to track spending and allocate income purposefully, so that they can build some financial momentum and keep lifestyle spending in perspective.
A good place to start can be the ASIC personal financial planning site, known as MoneySmart. To take a look at the MoneySmart budgeting tool click here.
Time in the market, not timing the market
Once your kids are in a position to build an investment portfolio, the most valuable lesson you can pass on is that investing in growth markets, such as shares and property, is all about being in it for the long haul and not just a quick killing. “Timing the market” by trying to pick short-term winners is more akin to gambling than it is to investing. “Time in the market” is a much more important principle, which will enable them to ride out fluctuations and build real wealth.
A financial planner can offer expert advice when it comes to all these financial habits and practices, so encourage your kids to find one they can relate to and build a long-term relationship with.
What other pearls of financial wisdom would you like to share? Tell us below.